* Libor 3-mth rates, spreads fall following c.bank cuts
* Sterling Libor/OIS spread collapses by 50 bps
* Overnight deposits at ECB still top 200 bln euros
(Updates with Libor fixing, adds comment and quotes, changes
byline and dateline. Previous: SINGAPORE)
By Jamie McGeever
LONDON, Dec 5 The bank-to-bank cost of lending
three-month money fell on Friday following several deep interest
rate cuts around the world the previous day and the premium paid
for unsecured funds, particularly sterling, also fell.
A day after the central banks of the euro zone, Britain,
Sweden and New Zealand slashed borrowing costs by between 75 and
175 basis points, money market tensions eased.
Three-month euro London interbank offered rates fell for the
42nd consecutive session, the euro Libor spread over anticipated
policy rates was its narrowest for two months and the sterling
Libor/OIS spread got crushed by around 50 basis points.
But analysts pointed out that the shrinking gap between
Libor and Overnight Index Swap rates -- a sign of easing money
market strains -- was in a large part due to disappointment
among investors over the UK and euro zone rate cuts.
Some investors interpreted comments from European Central
Bank President Jean-Claude Trichet as a sign the bank may pause
its rate easing cycle, while three-month sterling OIS edged up
after the Bank of England's percentage point cut didn't meet the
more dovish bets in the market for a deeper cut.
Anxiety over banks' year-end funding needs means banks are
more prone to keeping cash on their books for year-end
accounting purposes rather than lend.
ECB data showed that euro zone financial institutions once
again opted to deposit well over 200 billion euros at the
central bank overnight.
"While rate cuts can't fix the problem at the heart of this
crisis ... monetary policy plays a crucial role in the current
environment as a confidence stabilizer and a liquidity
provider," said Lena Komileva, head of G7 Market Economics at
"The impact on OIS rates from this month's less dovish ECB
and BoE communication drains liquidity and generates a great
deal of uncertainty at a time when the market badly needs
visibility and the ability to rely on a credible policy
framework. This all but destroys any chance of a year-end risk
On Friday the three-month sterling Libor/OIS spread shrank
by 52 basis points to 202 basis points. Earlier this week the
spread hit its highest level of the entire crisis, barring a
brief spike to 300 basis points on the day the BoE stunned
markets with its 150 basis point rate cut last month.
Three-month euro Libor had its biggest fall since the ECB
last cut rates in November, and has now fallen every day since
The euro Libor/OIS spread narrowed a decent amount too, to
152 basis points. The Libor/OIS spread is seen as a gauge of
banks' willingness to lend to each other -- a narrowing spread
indicates increased inclination to lend.
Libor rates are only indicative prices of where banks are
lending to each other, which institutions use as a base to set
their own lending rates.
Francis Yared, rates strategist at Deutsche Bank, welcomed
the central bank action on Thursday but said there's unlikely to
be a major tightening in spreads because three-month EONIA rates
are still well below the ECB's 2 percent refi rate.
This could put a dampener on how much banks lend out to
mortgage holders, consumers, companies or each other.
"It's not going to be massive," he said.
British Prime Minister Gordon Brown on Friday urged banks to
pass on the BoE's rate cut to help homeowners hit by the worst
economic turmoil in decades.
"We are taking action to try and get that (Libor) down.
Banks should really pass on the interest rate cuts," he told
"We will be talking to the banks again."
For more on the British Bankers' Association's Libor fixings
on Friday, see [nL535478].
Earlier on Friday, ECB data showed European banks deposited
236.67 billion euros at the ECB overnight as of Dec. 4, up from
231.68 billion euros reported on Thursday.